Tag Archives: business model

As with subscriber numbers, there’s a big gap between the two biggest telcos in the U.S. – AT&T and Verizon – and the rest of the field when it comes to capital spending. Both companies are planning multi-billion dollar investments in their networks in 2018, according to a story by Sean Buckley in FierceTelecom, with AT&T planning to spend $25 billion on capital upgrades in 2018, while Verizon is looking at the $17 billion to $18 billion range.

That includes spending on their mobile networks as they move toward 5G upgrades. It’s a much different story for pure wireline plays.

Number three on the list – CenturyLink – barely hits a dime on the dollar versus AT&T, with $2.6 billion spent last year and a 2018 capital budget pegged at 16% of revenue, whatever that turns out to be. Its priority will be integrating newly acquired Level 3 Communications into its overall operations. According to the FierceTelecom story…

“We have to keep driving profitable growth,” said Glen Post, CEO of CenturyLink during the fourth quarter earnings call. “Most of it will be success based. The allocation of capital [will] shift harder in making sure it’s for return profiles that are higher, take advantage of our on-net footprint, and are predictable whether it’s a cost reduction or driving profitable margin growth.”

Translation: regardless of what we said in order to get regulatory approval of the deal, we’re going to bundle Level 3’s long haul fiber assets into CenturyLink’s monopoly business model. Adios dark fiber.

Frontier is a distant fourth, with a 2018 capital budget of between $1 billion and $1.5 billion and a number one priority of “finding ways to reduce costs”. In other words, it’s going to spend money on its infrastructure only when it absolutely has to – replace burnt out poles in Santa Barbara County, maybe? – or to meet self liquidating commitments, such as those it made to get $2 billion in federal Connect America Fund subsidies. Given Frontier’s possible plans to exit California, that might well be the best it can do.

A national project to build fiber-to-the-premise infrastructure and offer it to any Internet service provider on a wholesale basis began in New Zealand in 2011, with an initial goal of reaching 75% of Kiwi homes and businesses. According to a study done by International Data Corporation, a research firm, and sponsored by Spark, the biggest NZ reseller of FTTP service, the build out has reached about 65% of NZ premises, and the goal is now to reach 87% by 2022.

A total of 92 resellers are using the wholesale network to offer retail service. The resulting competition resulted in a drastic drop in retail prices, according to the report…

New Zealand telecommunication’s structural separation and national broadband plan have created new constructs and market dynamics. The [Ultra Fast Broadband] initiative has commoditised fibre in New Zealand. Consumer fibre plan prices have plummeted from averaging over NZ$200 per month in 2013 to around NZ$85 per month as at February 2018.

In U.S. dollars, that’s a drop from $144 (or more) per month in 2013 to $61 per month now.

The report questions whether the current level of competition can be sustained. But it also shows that there’s a big gap between the a long tail of small competitors and the handful of market leaders who, presumably, have staying power. Five companies own 91% of subscribers, and all have complementary businesses that share much of the operating costs, including marketing and subscriber management. One is Spark, which is the legacy telephone company in New Zealand, two are mobile carriers – Vodafone and 2degrees – and two are energy companies.

Even if there’s a huge cull amongst the remaining 86 providers, the level of competition will remain high. Five companies competing to offer gigabit class Internet service for $60 or so a month is a robust market, far more competitive than the monopoly/duopoly conditions in nearly all of the U.S..

Leichtman’s report was published before Wow cable released its final 2017 financial results, so I added those into the totals. Over the course of 2017, the top cable companies added 2.7 million broadband subscribers, while the top telcos lost 626,000 subs. Big cable’s share of the, um, market was up a point to 61%, while the largest telcos lost a point, dropping to 34%.

Overall, the race for broadband customers is down to a two and a half horses. Comcast has 26% and Charter is behind by a nose at 24%. Their combined 50% share (after rounding) is up from 48% at the end of 2016.

AT&T was the only other broadband provider to hit double digits, with 16% of U.S. broadband households. It was also the only big telco to show growth in broadband customers – fiber-to-the-home gains offset DSL loses, producing a net increase of 114,000 subs. Cincinnati Bell, a much smaller fry, was also in the black, adding 5,500 subs. All the other big telcos – Verizon, Frontier, Windstream and FairPoint – ended 2017 with fewer broadband customers than they started it with.

The top providers – seven cable companies and seven telcos – account for 95% of U.S. broadband households, according to Leichtman. Since it’s a choice between one cable and one telephone company, at most, for any given home, it’s technically a duopoly. But one with a junior partner who is on the ropes. Factor in cable’s overwhelming superiority in the 25 Mbps down/3 Mbps up and better category – the minimum federal standard for modern broadband service – and it looks more and more like a one player game.

If it prices like a monopoly, slams and crams like a monopoly and shows a monopoly’s lack of respect to its customers, then it’s a monopoly.

The U.S. cable industry’s broadband subscriber count grew by 1.7% in the last quarter of 2017, while telephone companies continued to lose customers. That’s the top line from a tally by FierceTelecom of 15 of the 16 largest Internet service providers (Wow Cable hasn’t reported yet, although check the link – FierceTelecom will be updating its numbers). It’s a trend that continued throughout 2017.

In total, cable companies added 918,000 Internet subscribers, while the telco loss was a bit more than 7,000 subs – negligible in terms of percentage, but a significantly bad result in a growing market.

There are six cable companies and nine telcos on the list, with Comcast topping the chart at 22.8 million broadband subscribers, and Charter close behind with 22.5 million subs. A more distant third place goes to AT&T with 14.3 million subs, and Verizon came fourth with 12.0 million subs. All four added to their broadband subscriber counts in the final three months of last year, but not at the same rate. The two top cable companies increased their customer base by 1.4%, while the two big telcos only grew by 0.5%.

The reason cable companies are gaining while telcos, in aggregate, are losing customers – despite a 1.1% increase for the broadband industry (or at least the big dogs) as a whole – is clear. AT&T reported that it gained 95,000 broadband customers overall, but that includes a loss of 76,000 DSL subscribers. Frontier lost both subscribers on both DSL and fiber to the home systems, but the bleeding was much heavier on the copper side of the ledger.

Speed matters. Although cable-based Internet service is not uniformly excellent, it is virtually always better than DSL service telcos can offer. It’s better than the federal advanced services standard of 25 Mbps download and 3 Mbps upload speeds, which only the top tier of copper-based telco systems can touch.

Cable TV subscriptions have been trending downward over the five years that PWC has been running this survey. A total of 73% of homes have cable (or satellite) TV service, but that breaks down to 46% traditional, big line up subscriptions and 27% “cord trimmers”, who are people who have skinnier packages that they supplement with online – over the top (OTT) – services.

Even so, the cost of watching video keeps going up…

The number of traditional Pay TV subscribers continues to drop as more people are trimming or cutting the cord completely.

73% of our respondents subscribe to Pay TV, which is down from 76% last year and 79% the year before.

At the same time, people report they’re paying more for video today than they were last year.

53% of cord trimmers report paying more for their services in 2017 than they did in 2016; however, trimmers are still paying less than traditional subscribers overall.

Sports is the number one reason people keep paying cable TV companies. If there was another way to see live sports, 82% of sports fan would either trim back their cable subscriptions or chop them completely, according to PWC’s research.

Another interesting finding: 73% of households have Netflix, putting it dead even with cable and satellite providers on an overall basis, and way ahead of the old school, old business model subscriptions.

As traditional video subscribers flee, cable companies and AT&T, which owns DirecTv, will be looking for ways to either bring them back, or charge more for other services. Like un-throttled, un-blocked and un-prioritised broadband service. If they continue to offer it at all.

Size matters in the telecoms business. That’s true when success is measured by broadband subscriber counts, as I explored in yesterday’s post, and it’s true for share prices too. Some companies might be heading for a very hard landing.

It’s the small and mid-sized telephone companies that are in the roughest shape. CenturyLink’s share price is down 41% since this time last year, which is the best of the middle of the pack. Its purchase of Level 3 Communications seems to be slowing its descent. The picture is much worse for Windstream (down 73%) and Frontier Communications (down 82%). That’s led to speculation that complete collapse might be just over the horizon, according to a story by Joan Engebretson in Telecompetitor…

“The market anticipates that both these companies will go bankrupt in the not-too-distant future, judging by their sagging bond prices and nosebleed credit default swap prices,” said [MoffettNathanson financial analysts]…

Frontier’s issue, according to the researchers, is that in the residential and small to medium business market, it is competing using mostly obsolete copper assets against technologically superior cable HFC and wireless. And CenturyLink faces the same issue in those markets, although that company is not so reliant on those markets.

In the residential and SMB market, however, “the competitive endgame is preordained,” the analysts wrote. “The telcos are destined to lose this one.”

By comparison, the big telcos are performing pretty well, although not at the same level as the two cable giants. Comcast (up 15%), Charter Communications (up 22%) and Verizon (up 2.4%) have all seen their share prices increase over the past year. AT&T is the exception, with its share price dropping 5.4% over the past 12 months. But it’s still pursuing its troubled takeover of Time Warner, which has knocked its valuation around. At its most recent peak, before the feds dropped the hammer on the deal, AT&T’s stock market performance over the past year looked a lot like Verizon’s.

Although most small cable companies are still gaining broadband subscribers at least to a degree, the industry-wide downward trend in video subscriptions is hurting their business model. Their future upgrade paths – a choice between costly fiber to the home rebuilds or less pricey but less capable DOCSIS 3.1 technology upgrades – create uncertainty. Altice USA, which is also plagued by doubts about its rapid acquisition and expansion strategy, has lost 42% of its stock value since it started trading separately from its European parent company last June.

Cable companies are widening their lead over telcos in the battle for broadband market domination. According to a tabulation by FierceTelecom that tracks the top 15 wireline broadband companies, cable companies picked up a net gain of 2 million broadband subscribers, while telcos lost 430,000 during the first nine months of 2017.

One clear trend: whether it’s the cable or telephone side of the ledger, the big are getting bigger, and the small are struggling.

Looking just at the third quarter – July through September – Charter Communications was the cable company gaining the most, adding 249,000 net new broadband subs, but Comcast wasn’t far behind, with a bump of 214,000 subs.

That’s pretty much the cable industry. The next three biggest – Cox, Altice and Mediacom – had a combined net gain of just 66,000 subs, while the two smallest on the list, Wow and Cable One, lost a combined total of 5,000 broadband subs.

It’s a similar story for telephone companies. AT&T and Verizon gained 125,000 and 66,000 broadband subs respectively, while every other telco lost wireline customers. CenturyLink was hit the hardest, losing 101,000 subs, while Frontier bled 63,000 subs. The small fry – Windstream, Consolidated, TDS, Cincinnati Bell and Hawaiian Telecom – also saw declining broadband subscriber counts in the third quarter.

A harder look at AT&T’s and Verizon’s numbers points to the problem. Both companies lost legacy DSL customers – 96,000 and 76,000 subs respectively – while gaining with advanced DSL and fiber-based service. Cable’s overall advantage, as well as the gap between the gainers and losers, is likewise explained by technology. According to FierceTelecom, “cable’s aggressive DOCSIS 3.1 rollouts, which enable operators to deliver 1 Gbps over existing HFC infrastructure, continue to make cable a force telcos find hard to compete with on the speed front”.

Comcast, AT&T and Verizon have the capital to pursue upgrade strategies. Charter does too, although its strategic thinking is also driven by regulatory requirements imposed when it bought Time Warner Cable last year. Cox seems to be holding its own, although as a privately held company it doesn’t disclose much. The rest have a harder road ahead, and there’s no guarantee they’ll make it to the end.

As earnings season has approached in each quarter of 2017, analysts have predicted the watershed moment where linear pay TV losses surpass 1 million customers.

The market came close in the always-volatile second quarter, losing 976,000 subscribers…

The top 10 publicly traded operators, which account for about 95% of the market, reported losses of around 398,000 video customers in the third quarter. Discounting gains made by virtual MVPDs DirecTV Now and Sling TV, these operators lost around 820,000 traditional pay TV users.

Factoring in the pay TV business’ record-breaking first-quarter subscriber losses of 762,000, the industry has lost around 2.5 million linear customers through the first three quarters of 2017.

Among the big players, the big losers were DISH Networks and Altice USA. Both lost about 1% of their traditional linear video subscribers in the third quarter of 2017. Aside from Cox, which is privately held and doesn’t publish its key subscriber metrics, the rest hovered around a half-percent loss – AT&T/DirecTv and Verizon just below that mark; Comcast and Charter just above it.

On the other hand, AT&T/DirecTv and DISH saw big gains in their over-the-top video services. AT&T reported a gain of 296,000 DirecTv Now subscribers and DISH is estimated to have added 113,000 Sling TV subs, according to the Fierce Cable story.

Cord cutting is changing the video game, although it’s too soon to start talking about the death of the linear TV subscription business model. The seven biggest operators still have close to 90 million subs. Taking a weighted average of the five companies that report revenue per subscriber (Verizon and Cox don’t), they’re getting about $123 per month per customer. That’s a total of $11 billion every month.

The trend is bad, though. The 2.5 million TV subscribers lost this year represent about $300 million a month in revenue. There will be pressure to replace it, and the first place to look is on the broadband side of the ledger. That’ll be tough for DISH, since it’s still a pure satellite play, but the rest sell – and price – broadband on a monopoly/duopoly basis. As TV viewing shifts to Internet-based services, consumer tolerance for higher broadband subscription prices will increase.

You can bet AT&T, Verizon, Comcast, Charter, Cox and Altice will test that tolerance, right up to the breaking point.

“DirecTV, like all of its cable peers, is suffering from the ravages of cord-cutting,” said industry analyst Craig Moffett in a research note this week. Moffett added that while nobody expected AT&T’s pay-TV numbers to look good, hardly anyone could have predicted they would look “this bad.”

“MSOs would need to raise standalone broadband pricing to $80, or more, in order to break even from a contribution perspective,” UBS analyst John Hodulik said.

The good news (for operators, but not consumers, that is)? Cable companies can probably get away with it, the analyst noted.

“We find that this level of pricing (non-promo) exists in some markets already, though pricing will vary,” Hodulik explained.

Cable companies have it easier than telcos. They’re losing video revenue, but are better at hanging on to subscribers. Cable companies generally offer download speeds of 100 Mbps or (sometime a lot) more for prices comparable to what telcos will charge for a tenth of that service level. A household that wants to get TV programming via the Internet is going to be more interested in those faster speeds.

Higher costs, relative to the number of homes served, and lower income levels, compared to urban areas, is the fundamental business model problem that has to be solved in order to extend wireless broadband service into rural area. But it can be solved, even in some of the most extreme cases. David del Val, Telefonica’s head of research and development in Latin America, described the hurdles he’s encountered delivering Internet connectivity to remote regions, in a speech at last week’s inaugural Mobile World Congress Americas trade show in San Francisco.

The challenge, del Val said, is that connecting a person in a rural community to mobile service is three times more expensive than in urban areas.

Telefonica is installing cell sites in Brazil along the Amazon river, in the mountains of Chile and in other areas where customers are thin on the ground. Building middle mile backhaul facilities are a particular challenge, he said. Satellite is ubiquitous but the service comes with a high price tag. So does fiber. Microwave links are also expensive, particularly when the cost of maintaining them in very remote areas, such as the Amazon basin, is factored in. Even so, it’s a workable solution according to del Val.

Then cell sites have to be built. The cost of building access points in rural areas might be comparable to costs in cities, but population densities are lower, so more towers are needed to reach the same number of customers. Operating costs also increase the farther away you get from urban areas. Del Val said that it can sometimes take days for an engineer to get to a base station in the jungle when there’s a problem.

Some of the communities that del Val serves are poorer and far more remote than any you would find in California. The numbers here are different, but the equation is the same. If it can be solved in the jungles of Brazil, it can be solved here too.